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In what is nothing short of a monumental decision, on January 11, 2019, the Pennsylvania Commonwealth Court in Allan Myers L.P. v. Department of Transportation ruled that nearly all project labor agreements in Pennsylvania are illegal under the Commonwealth’s procurement code.

What are Project Labor Agreements?

In short, Project Labor Agreements (PLAs) are pre-hire agreements that set the working conditions for all employees of contractors working on a construction project. Typically, a PLA is entered into between an public or private construction project owner and certain local building trade unions.  PLAs require the use of union labor that is to be hired exclusively through the hiring halls of the unions who are parties to the PLA. PLAs are controversial because, among other reasons, while not expressly excluding non-union contractors from performing work on the project, they require non-union firms to use union members instead of their regular employees.

Legality of Project Labor Agreements

Generally, whether a PLA is legal mostly depends on the law of the state where the project is being located.  (However, there are several compelling arguments that PLAs are invalid under current U.S. Supreme Court precedent.) Seven states, including New Jersey, have statutes that expressly permit PLAs.  Twenty-four other states have statutes that expressly prohibit PLAs from being utilized.  The remainder, including Pennsylvania, have no statute expressly addressing the legality of PLAs.

Allen Myers LP v. Dept of Transportation

The case involved a PLA that PennDOT had negotiated with the Philadelphia Building and Construction Trades Council (the “Unions”) for a project in Montgomery County known as the Markley Street Project.  The PLA obligated bidding contractors to hire craft labor personnel through the Unions and to be bound by the Unions’ collective bargaining agreements.  Allan Myers, a non-union contractor, filed a bid protest challenging the legality of the PLA. Allan Myers raised several arguments against the PLA including that the PLA was discriminatory because it unduly favored union contractors over non-union contractors.

PennDOT responded to the challenge arguing that case law authorized the use of a PLA in bids for public construction projects and that because the PLA provided that “any qualified contractors may bid or perform work on this Project” regardless of their union affiliation or lack thereof.  Therefore, PennDOT contended that Allan Myers could bid on the Markley Street Project.

However, the Court ruled in Allan Myers’ favor and held that PLAs are contrary to Pennsylvania’s competitive bidding requirements. The Court held that it was well settled that under the Commonwealth Procurement Code contracts are to be awarded by competitive sealed bidding to “the lowest responsible bidder.”  The Court then recited the purpose of competitive bidding which is to guard against “favoritism, improvidence, extravagance, fraud, and corruption in the awarding of contracts,” and to place contractors on “equal footing” so as to promote open and fair competition.  The Court then noted that “where there is no common standard on which bids are based, “[t]he integrity of the competitive bidding process is violated and the purpose of competitive bidding is frustrated.”

The Court then applied these principals to the PLA and found that the PLA does not place nonunion contractors “on an equal footing” with union contractors because a nonunion contractor that bid on the Markley Street Project could not use its own experienced workforce. Rather, it was required to hire its employees on the Project through the Unions’ hiring halls. Therefore, Allan Myers would essentially be required to bid on a project with an unknown workforce.

What’s next?

For the moment, any Commonwealth project with a project labor agreement attached to it is ripe for a challenge.  Thus, any non-union contractor interested in bidding on a project subject to a PLA in Pennsylvania should consider a challenge.  However, the question remains as to how long this holding lasts.  One would suspect that PennDOT would appeal this decision to the Pennsylvania Supreme Court.  There, given the Courts current make up, the legality of PLA’s may be viewed more favorably.  As such, the Myers decision may have the unintended effect of cementing the legality of PLAs in Pennsylvania until the legislature acts.

A friend came to me with a question regarding a case he was working: “can a public owner require that bidders use a specific brand name product?”  “Of course not,” I said “proprietary specifications are illegal.”  Or, at least that’s what I assumed.  To my surprise, the law in the Commonwealth of Pennsylvania is not as clear as it is in other jurisdictions.

What is a proprietary specification?

A proprietary specification lists a product by brand name, make, model and/model that a contractor must (shall) utilize in construction.  A basic example of a proprietary specification would state:

“Air Handlers shall be “Turbo Max” as manufactured by Chiller Corp.”

There are two problems with a proprietary specification (other than potentially being illegal): (a) they limit competition, and (b) invite steered contract awards.  They limit competition because it limits the type of material that can be used on the project.  In the example above, there could be equivalent air handlers available at a better price but the contractor could not use that lower priced product in its bid.  Thus, the taxpayers end up paying more for tile.  Also, contractors may not be able to secure a certain brand name product because of exclusive distribution agreements.  Again using the example above, contractor A’s competitor may have the exclusive distribution agreement with Chiller Corp.

Besides being more costly, this situation invites favoritism and fraud, which public bid laws are designed to prevent.  If the design professional that is drafting the specification knows that a certain favored contractor has the exclusive right to distribute a product, the design professional can draft the specification in a way that steers the bid to that favored contractor.

Federal Law

Most federal agencies prohibit proprietary specifications.  For example, with limited exceptions, FHWA regulations prohibit contracting state transportation agencies receiving federal funds from requiring the use of a patented or proprietary material, specification, or process.   Likewise, under FAR’s “Material and Workmanship Clause,”  “[r]eferences in the specifications to equipment, material, articles, or patented processes by trade name, make, or catalog number, shall be regarded as establishing a standard of quality and shall not be construed as limiting competition. The Contractor may, at its option, use any equipment, material, article, or process that, in the judgment of the Contracting Officer, is equal to that named in the specifications, unless otherwise specifically provided in this contract.”

New Jersey Law

Many states have also banned proprietary specifications.  In New Jersey (where I frequently practice), the Local Public Contracts Law bans local government agencies from using proprietary specifications.  However, on NJDOT projects that do not receive federal funding, proprietary specifications are not per se prohibited.  But, a contractor can request substitution of the specific product.

Pennsylvania State Projects

In contrast, Pennsylvania does not expressly address proprietary specification by statute.  However, under Department of General Services’ guidelines, which apply to state projects including PennDOT, proprietary specifications are strictly limited.  Section 205.1 of DGS’s Project Procedure Manual states:

“Specifications for DGS projects are “or equal” specifications, and products available from a single manufacturer, or a limited number of manufacturers, are not to be used in project designs. DGS requires at least three (3) manufacturers of an available product to be specified, but bidders may use equal products/manufacturers as approved by the Professional, as per the General Conditions to the Construction Contract.”

Pennsylvania Local Projects

Pennsylvania Municipal and County projects are not subject to DGS’s guidelines.  Instead, a patch work of statutes applying to Pennsylvania’s Byzantine system of Cities/Township of the First/Second/Third class, govern procurement at this level.  All of those statutes require that bids be awarded to the lowest responsive and responsible bidder.  However, none specifically restrict the use of proprietary specifications.

Therefore, bidders facing a proprietary specification at this level must rely upon the Pennsylvania common law public policy of assuring the best price possible for the taxpayers and guarding against favoritism, extravagance, fraud, and corruption in the awarding of municipal contracts.

What to do about it?

If you encountered a proprietary specification, whether on a Federal, New Jersey, or Pennsylvania contract, you need to act before the time of bidding or your claim may be barred by statute or waived.  When and how that objection is lodged depends on the project and contracting authority.  If the bids have been opened and a proprietary specification has resulted in you losing the award, the potential still exists to challenge the award but the burden could be higher.  Therefore, understanding how to spot a proprietary specification and what the law is in the area is the best chance at successfully challenging it.

There is a common misconception that all Philadelphia Public Works projects must be performed pursuant to a project labor agreement with various members of the Building and Construction Trades Council.  This common misconception is even shared by the current Mayoral administration, who I saw in a recent court filing testified under oath that “project labor agreements are required for all construction projects in Philadelphia with a value of at least five million dollars.”  (As is discussed below this is flat out false.)

No one has yet to step forward to challenge Philadelphia’s project labor agreement scheme.  However, if someone did, I think the challenge would be successful for three reasons.  First, contrary to the Mayor’s representative’s statement, there is no requirement that all projects in excess of $5 million be subject to a project labor agreement.  Second, Philadelphia’s project labor agreement excludes signatories to collective bargaining agreements with the United Steel Workers (USW) from participating,which violates public bid laws. Third, the exclusion of the USW, also gives rise to a challenge that federal labor law preempts the project labor agreement.

A. Background on the Philadelphia PLA.

Under a project labor agreement (PLA), a contractor wishing to perform work on a project agrees to be bound by the terms and conditions of employment established by the public owner and certain construction unions.  Each PLA varies, but typically PLA’s will require a contractor’s employees to become members of a union – if they are already not members – in order to work on a project or will require a contractor to hire labor from a union hiring hall.  PLA’s are controversial because they exclude non-union contractors from performing work on a project subject to a PLA, unless of course that contractor agrees to become “union” for purposes of that project. For reasons beyond this blog post, a merit shop contractor would be crazy to do that.

The “Philadelphia PLA” that Mayor Kenney believes is required for all public projects over $5 million was instituted by Mayor Nutter through a 2011 Executive Order (Executive Order No. 15-11, Public Works Project Labor Agreements).

B. The Language of the Philadelphia PLA.

Few people, including the current Administration, have apparently actually read the Executive Order.  If they did, they would realize that not only does it not require PLA’s it expressly states that they are not required.  This subject is made clear in Section 3(c) of the Executive Order:

What it does require are certain prerequisites before a public project is subject to a PLA.  Prerequisites that the current Administration and the one before it have ignored.

According to the Executive Order before any project is subject to a PLA, it must be reviewed to determine if a PLA would be appropriate for that particular project.  The review must be performed by the City Agency procuring the contract and a written finding concerning the appropriateness of a PLA must be forwarded to the Mayor’s Office.

 

 

My understanding is that these City Agency evaluations backed by a written finding have never been done for any project in Philadelphia subject to a PLA.  (However, if anyone has seen such a finding, please forward it to me.)

Moreover, the written recommendation that the City Agency makes must go further than simply saying “we think a PLA is good.”  The Executive Order requires the Agency to “describe how it will benefit and enhance the interests of the City on the basis of costs, efficiency, quality, safety, and/or timeliness” and “shall specifically address” a number of other factors, including, safety, costs, dispute resolution, the need to skilled labor, and “the opportunity to provide significant employment opportunities for qualified City residents, including minority males and women, and for women – and minority owned businesses.”  Basically, the exact opposite of the demographics of the unions in Philadelphia.

Once an Agency makes this written determination, the Mayor’s Office is supposed to review it and consult with the Agency.  The City is also required establish a PLA “Advisory Committee” which is supposed “monitor and evaluate” PLA’s and “make periodic evaluations to the Mayor regarding the use of [PLA’s].”  To my knowledge this Advisory Committee does not exist.

C. Challenge Pursuant to Public Bid Laws.

Because Philadelphia is not following its own law before instituting PLA’s, any project that is advertised as being the subject of a PLA is susceptible to a challenge. If a provision in bidding specifications denies the public the benefit of a fair and just competitive process, a taxpayer may bring a challenge.

D.  The USW Issue.

The model PLA which is attached to the Executive Order states that the collective bargaining agreements of members of the Philadelphia Building and Construction Trades Council (BCTC) shall govern, notwithstanding the provisions of Local or International Agreements which may differ.  Not every union is a member of the BCTC.  Notably, the USW is not.  Despite the name, the USW does not only represent steelworkers.  In fact, they represent construction workers of varying trades.

A contractor signed with the USW wishing to bid on a Philadelphia Public Works project, finds itself in an irreconcilable predicament.  If it agrees to the PLA, it will be in violation of its collective bargaining agreement with the USW which already governs the terms and conditions of its employees’ employment.  Therefore, it cannot agree to be bound to another union’s agreement.  Thus, Philadelphia PLA has the effect of excluding contractors who have CBA’s with the USW.

Pennsylvania public bid laws state that a public agency cannot exclude bidders from bidding on a project by “imposing conditions on one prospective bidder, which are not imposed upon all.”  Requiring a a signatory to the USW to breach its CBA with the USW imposes such a condition.

Excluding the USW posses another issue.  Under the National Labor Relations Act, employees have the right to form or be represented by a union.  Under the Act, if the union is properly designated as the employees representative, an employer must deal exclusively with the union.  Therefore, the Philadelphia PLA is in conflict with federal labor law.  Why?  Because a USW member cannot work on a Philadelphia Public Works project and be represented by the union of its chose.  Also, a USW contractor would be forced to ignore the USW as the bargaining agent of its employees in order to work on a Philadelphia project.  If a state or local ordinance has this effect, the Supreme Court has held it is preempted by the National Labor Relations Act.  The Philadelphia PLA appears to have that effect.

 

 

My friend and colleague, Chris McCabe, recently published an opinion piece on Philly.com concerning the May 16 ballot question that asks Philadelphia voters to approve a change in the way Philadelphia awards public contracts.

Currently, Philadelphia, like all municipalities in Pennsylvania, uses an objective lowest responsible bidder standard in the award of public contracts. Under this approach, public contracts must be awarded to a bidder that responds to all of the criteria of the request for bids and offers the lowest price. Under this traditional approach the award of public contracts is completely transparent.

Continue Reading Philadelphia Voters to Consider Best Value Bid Procurement

Because of my personal political persuasions (pro-freedom) and success in litigating cases against the government and other media about those cases businesses frequently approach me about bringing claims against local governments and agencies for interfering with their Constitutional rights.  Actions by local government agencies that could give rise to a Constitutional violation include: treating a developer’s project differently than a similar project, revoking a previously issued zoning or building permit, disqualifying a contractor from bidding on a government contract, retaliating against a business owner for speaking out against the local agency or one of its members, or unnecessarily delaying the issuance of a permit. The Constitutional rights most typically implicated in these cases are those guaranteed by the 5th and 14th Amendments to the United States Constitution.  However, the 1st Amendment is also frequently implicated.

Suing a local government agency for violating your Constitutional rights is not easy.  However, the federal statute under which the cases are brought, 42 U.S.C. Section 1983, provides for the award of a successful plaintiff’s attorneys fees.  This is true even if the Judge or jury awards a mere $1 is damages.  Moreover, sometimes there can be a strategic value in the litigation.

This is the first in a series of blog posts exploring claims available to businesses harassed by local government agencies and officials and the challenges inherent in successfully bringing those claims.  We will start with a claim for a substantive due process violation.

Under the 5th Amendment, businesses and individuals cannot be subject to arbitrary and capricious application of the law.  In other words, there must be some objective standards for a laws application.  Before 2003, substantive due process claims in the land use context were fairly common. a party could bring a substantive due process claim whenever there was an “improper motive” by the local government authority. However, the Third Circuit changed that standard in United Artists v. Township of Warrington, 316 F.3d 392 (3rd Cir., 2003), where it held that in land use cases, only those actions by a local government agency that “shock the conscious” could act as a basis for a substantive due process claim.  The Third Circuit’s rationale is that it did not want to turn the federal courts into a super zoning board.

While determining what actions meet the “shock the conscious” standard is fact sensitive, Courts in the Third Circuit have set a high bar for plaintiffs bringing substantive due process claims.  Under existing precedent, Courts in the Third Circuit have said the following could be conscious shocking:

  • corruption and self dealing;
  • fraudulent conduct;
  • personal animus towards the property or business owner; and
  • conduct that violates some other constitutionally protected right

A substantive due process claim is usually brought together with other claims such as an equal protection or procedural due process claim.  So, even if the facts do not a support a claim for a violation of substantive due process rights, a person or business may still have a constitutional claim.

Because substantive due process claims are fact sensitive, a business that feels that its substantive due process rights are being violated should start to create a record and document those actions that it believes amount to a substantive due process violation.  This record can then be used to defeat a motion to dismiss which likely will be filed by the defendants.

 

In an opinion overturning a $17,000,000 bridge painting contract for the Commodore Barry Bridge, a United States Federal Judge called the procurement practices of the Delaware River Port Authority “a black box . . . obscure and unexplained, and lacking any indicia of transparency or the hallmarks of a deliberative process.”

The case involved lead paint remediation and repainting of the Pennsylvania span of the Commodore Barry.  Seven contractors submitted bids.  Alpha Painting was the apparent low bidder.  Corcon was the second low bidder. Corcon was also the contractor that was perform the painting work on the New Jersey span of the bridge.  Like most agencies engaged in public bidding, the DRPA requires contracts to be awarded to the lowest responsible and responsive bidder.

Six weeks after the bids were opened and read aloud, “after an undocumented process shrouded in mystery and obscured from public scrutiny, the DRPA notified Alpha by an undated letter that it had determined that Alpha was ‘not responsible,’ and rejected its bid.”  After unsuccessfully protesting the decision with the DRPA internally, Alpha filed a bid protest complaint seeking injunctive relief against the DRPA.

After a three day trial, Judge Noel Hillman of the United States District Court for New Jersey, entered an order and opinion granting Alpha the injunction it requested and ordering the DRPA to award the contract to it rather than Corcon.  Judge Hillman’s opinion provides a scathing review of the DRPA’s procurement practices.  Ultimately, Judge Hillman ruled that the DRPA acting arbitrarily, capriciously, and without reason. The opinion describes a culture at the DRPA that is designed to steer contracts to favored contractors rather than to award contracts to the lowest responsible bidder.

The DRPA gave two reasons for ultimately determining – six weeks after opening its bid – that Alpha was not a responsible contractor.  First, the DRPA said that Alpha had not included certain OSHA 300 forms with its bid. Second, the DRPA claimed that Alpha’s “experience modification factor” (EMF) was too low.

As to the OSHA 300 forms, the Court noted a factual dispute as to whether the forms were included with the bid or not.  Alpha claimed they were included and the DRPA claimed they were not. Notwithstanding this, the Court concluded that whether the forms were missing or not was a red-herring as the DRPA admitted it did not rely on the forms at all in evaluating a contractor’s safety record.  Instead the DRPA admitted it simply looked to see if the forms were completed and signed.

As to the EMF score, the Court explained that an appropriate score could only be achieved by contractors that had successfully completed projects in New Jersey and Pennsylvania.  As the Court observed, “the testimony established that a company can paint the Golden Gate Bridge for ten years in a row and not hurt so much as a sea gull and it will lose a DRPA bridge contract to an incumbent contractor who has to pay a penalty rate for insurance based on its recent employee injury records in New Jersey or Pennsylvania.”  Alpha, a Maryland contractor, had not completed enough projects in Pennsylvania and New Jersey to be eligible for an EMF score.  However, the DRPA’s chief engineer testified that there was no reason to doubt that Alpha was a responsible party with a good safety record. This led the court to conclude that the DRPA’s decision to declare Alpha non-responsible based on a EMF score irrational and incapable of “withstand[ing] even a cursory review much less scrutiny.”

However, the Court did not end by simply debunking the DRPA’s stated reason for rejecting Alpha.  Instead, the Court noted that the DRPA “recalculated” the bids so that Corcon, not Alpha, was the lowest bidder.  While this would appear objectionable on its face, for good measure, the Court found that the DRPA’s policies did not permit this practice.  Furthermore, the Court found that the DRPA permitted Corcon to supplement its bid with missing information after the bids were opened.  In fact, the DRPA went so far as to call Corcon’s insurance broker directly and ask that he supply certain forms that Corcon had omitted from its bid.

Based on these circumstances, the Court awarded Alpha the relief it requested and ordered the DRPA to award the bridge painting contract to it.

 

 

Sports fans are familiar with the scenario.  A team stands only seconds away from victory. It is so close many are already celebrating.  Suddenly, fate intervenes and a ball bounces off a glove, a half court shot swishes through the net, or a receiver catches a heaved touchdown pass.   That is what the losing team calls: snatching defeat from the jaws of victory.

Snatching defeat from the jaws of victory could also be used to describe the circumstances of a recently decided Pennsylvania Commonwealth Court decision in Allan A. Myers, LP v. Montgomery County.  The case involved the award of a county road paving contract.  Allan A. Myers was the apparent low bidder and winner of the contract.  In fact,  the County Commissioners passed a resolution announcing that Myers was the low bidder and awarded the contract to it.

However, before the paving contract could be formerly signed, the County entertained a bid protest from a disappointed bidder.  As a result of the protest, the County Commissioners adopted another resolution.  This one rescinded the prior resolution awarding the contract to Myers and awarding the contract now to the disgruntled bidder.

Not surprisingly, litigation ensued.  The trial court dismissed Myers’ case stating that as a matter of law “the mere act of awarding a public contract normally creates no binding obligation on the awarding entity without the proper contracting authorities going further and entering into and executing the contract.”

Myers appealed and argued that, under basic public contract principles, an enforceable contract existed when the County awarded the contract to Myers in the resolution.  The Commonwealth Court disagreed and affirmed the trial court’s dismissal of Myers’ action.  The Commonwealth Court explained that “where a statute prescribes the formal mode of making public contracts it must be observed, otherwise they cannot be enforced against the government agency involved.”

Looking to the statute governing the award of the paving contract, the Commonwealth Court reasoned that the language indicated that the Legislature intended that all contract be executed in order to be enforceable.

The take away.  Before you start celebrating a bid award, if the statute governing the award of your contract requires it to be executed to be enforceable, bird dog the government agency to get you that executed contract.

As has been discussed on this blog, the most common form of fraud involving the Department of Transportation’s disadvantaged business enterprise program, involves a “pass through” entity that performs little or no actual work on the construction project.  Under this common scheme, a general contractor hires a subcontractor that has been certified a DBE and uses the value of the work subcontracted towards the percentage of work it has agreed to perform using DBE firms, however, in reality, the DBE does not perform a “commercially useful function.”  Instead, the work is performed by a non-DBE firm or even the general contractor’s own employees.

Sometimes the fraud is one of willful ignorance of the scheme by the general contractor, who knows the pass through scheme is happening and simply winks, nods, and looks the other way.  Other times the scheme is more blatant and the firm guilty of DBE fraud willfully engages in the pass through scheme, like the one announced yesterday by the U.S. Attorneys Office in North Carolina.  There the U.S. Attorney filed a 29 count indictment against a North Carolina highway construction firm and its executives for taking part in a massive and complex DBE fraud scheme involving a pass through entity.  The case is troubling because of extent of the actions the firm and individuals involved took to try covering up the pass through scheme.

The indictment alleges that Boggs Paving, it’s President, Vice-President, CFO, and Chief Estimator violated federal mail fraud, wire fraud, and money laundering laws, by engaging in a massive scheme to obtain contracts through the North Carolina DOT by using a pass through scheme involving a DBE trucking firm.  (The DBE firm and its principal were also indicted.)

It is not criminal per se to violate the DOT’s DBE program.  What makes the violating the DBE program criminal is that it invariably involves violating federal mail and wire fraud laws.  An individual or corporation commits mail fraud when the U.S. mail is used in furtherance of a fraud scheme.  Likewise, wire fraud occurs when a telephone or the internet (i.e. the wires) are used in a scheme to obtain money from a person or entity through false or fraudulent pretense.  Mail and wire fraud occurs in the context of DBE fraud because mail, telephones, and the internet are used in submitting bids, payment applications, and DBE compliance reports all of which make false statements about the level of participation by DBE firms.  Moreover, because it is the use of the mail and wires that is the violation, firms and individuals can be indicted even though the DBE fraud involved a county or municipal DBE program.  Each mail and wire fraud count carries a maximum sentence of 20 years in federal prison.

Because all the government must show in a mail or wire fraud case is that the mail or wire was used in “furtherance of the scheme,” it is hard to imagine what defense the indicted individuals in this case will have to the government’s claims.  Here, without falsely claiming the level of DBE participation in writing there could be no DBE fraud because the NCDOT would never have paid Boggs for its work.

This case is a reminder that federal authorities are on the lookout for DBE fraud and the consequences for construction firms and their executives violating DBE rules.

The City of Philadelphia flagged eleven (yes this one goes to eleven) prime contractors for flaunting the City of Philadelphia’s DBE rules according to the City of Philadelphia Office of Inspector General.  According to the news release, the chief offender, William H. Betz, Inc., may have gotten off easy.  According to the OIG, Betz facilitated contracts between JHS & Sons Supply Company and ten prime contractors whereby:

providing JHS’ minority business certification and the supplies necessary to complete the job. As a result, Betz received more than $640,000 worth of business that was intended for legitimate minority-owned companies. JHS received at least $70,000 for acting as a pass-through.

As a result of a settlement agreement with the City, Betz agreed to repay the City $128,000 and is ineligible for City contracts for two years.  Why is this getting off easy?  Because the arrangement alleged by the OIG could have easily led to federal prosecution of Betz officials involved with the scheme.  For you to be indicted for DBE fraud, there is no requirement the project be owned by the federal government or be funded by it.  There is no actual crime known as “DBE fraud” and DBE regulations to not prescribe criminal penalties for violation of DBE rules.  Rather, DBE fraud almost invariable involves the federal crimes of mail fraud and wire fraud, which are the crimes that DBE fraudsters are prosecuted for.

Hall of Fame Philadelphia Eagles radio man Merle Reese once saw a play that seemed improbably — and perhaps against the rules — to which he disclaimed “he can’t do that!  Yes, he can do that!”  You might be thinking the same thing when you receive notice from your federal government client that the project is being shut down for lack of funding and you will be paid only for the work already in place.  This is a hard pill to swallow because your profit may not have come until a later part of the project that now will not be completed.

Almost all government contracts contain a termination for convenience clause that allows the government to terminate a contract without liability for breach of contract.  Such clauses owe their roots to military procurement contracts as a way for the government to avoid liability once a war ended. Under federal regulations, you may not recover anticipatory or consequential damages following a termination for convenience.  However, you are entitled to compensation for the work you performed at the time of termination and potential other costs delineated in your contract.

Yet, there are three exceptions to this general rule:  (1) when the government terminates the contract in bad faith; (2) the government abuses its discretion in its decision to terminate the contract; or (3) when the government enters into a contract knowing it will terminate it before it is completed.

Unfortunately, you burden of proving “bad faith” is a high. To establish a breach based on bad faith in this context, you must present clear and convincing evidence that the government’s termination was made with the “intent to injure” the contractor.   The clear and convincing standard is stricter than the preponderance of evidence standard that is normally applied in civil cases.  In determining whether the government clearly “abused its discretion” in terminating a contract for convenience, the court will consider four factors: (1) the CO’s bad faith, (2) the reasonableness of the decision, (3) the amount of discretion delegated to the CO, and (4) any violations of an applicable statute or regulation.

Termination for convenience clauses are just another factor you need to deal with in performing public work.  As is usually the case, yes the government can do that.